The Curious Conversion of Empire Blue Cross

James C. Robinson

Health Affairs. 2003;22(4) 

In This Article

Implications for Politics in Other States

The process and outcome of the Empire conversion has implications for every state with both a budgetary crisis and a nonprofit insurer potentially amenable to conversion. The long-standing consensus that conversions of nonprofit insurers (and hospitals) to for-profit status should endow a charitable foundation has been brought into question. The advocacy organizations that traditionally supported the creation of these foundations have been so intent on fighting the private sector that they did not perceive their vulnerability to the public sector. Politicians lack any inherent love for private foundations, especially ones that will support independent policy analyses, but acquiesce to the transfer of nonprofit assets to such entities when no better options are on the horizon. Modest precedents to the Empire outcome already existed: The Wisconsin Blue (Cobalt) conversion assets were used to subsidize the state's medical schools, and the Virginia Blue (Trigon) conversion funds were transferred to the state budget without being earmarked for health programs.

Not only does every state face a crisis in funding Medicaid and coverage expansions for the uninsured, but every one has numerous nonhealth projects that are highly valued by politically mobilized constituencies. At a minimum, advocacy organizations will need to argue that endowing an independent foundation, which holds the conversion assets in perpetuity and spends the interest on research and service projects, is socially more compelling than channeling the funds right away to Medicaid and other governmental priorities. This imperative may be a good rather than a bad thing, in that political competition will pressure foundations to be accountable in deed as well as in name to the community from which they obtained their funds.

The Empire Blue Cross conversion does preclude a new center for applied policy research, demonstration projects, and support for community-based health care programs in the Empire State. The special governmental fund that will receive the conversion assets will function in some ways as a foundation, channeling Empire's assets and other revenues to a variety of health programs, but the legislature has control, which means that its actions are subject to all of the political pressures that legislators face. It will dispense both the principal and the interest on the Empire assets, in contrast to the usual foundation approach of dispensing only the investment earnings. The public programs that will drawon the assets (with the exception of the wage increases) would otherwise have been funded by tax revenues. As the advocacy organizations feared, the charitable assets from the nonprofit conversion will be used as substitutes for rather than supplements to existing public funds.

After his reelection, Governor Pataki proposed diverting non-Empire revenues away from the fund and diverting to the health fund financial responsibility for programs previously supported by general tax revenue.[46] The public appropriation of the Empire assets reflects the political culture of New York State, with its centralization of authority within government and its skepticism concerning independent centers of policy influence. This contrasts with political cultures in states that never centralized power to such an extent and hence felt comfortable allocating conversion assets to private foundations to pursue idiosyncratic visions of public policy.

It is yet unclear how much attention other states will pay to the New York experience. In Maryland, for example, the Blue Cross plan (CareFirst) suggested that the legislature could appropriate the nonprofit's assets to the state treasury instead of endowing a foundation, but the Maryland insurance commissioner rejected the conversion proposal outright.[47] In Washington State the hospital association opposed the Blue Cross (Premera) conversion proposal but argued that if conversion were to happen, the assets'should be allocated to the hospitals rather than to a foundation (or to the state treasury).[48]

The legislative appropriation of the Empire funds created an unusual political alliance between a labor union, a Republican governor, a Democratic assembly, and the hospital industry. It engendered an equally unusual (albeit transient) intellectual alliance among critics on the left and right. Some liberals oppose the solution because of their philosophical opposition to the use of charitable assets as alternatives for public tax funds to support Medicaid and other health programs, viewing charitable and public funds ultimately as complements to rather than substitutes for one another.[49] Some conservatives oppose the solution because of their philosophical opposition to the appropriation by an expansionistic state of a new source of private funds, seeing nonprofit organizations as mechanisms for ameliorating social problems without recourse to state authority. For conservatives, charitable and public funds are substitutes more than complements. Both sides support foundations as a locus of policy analysis and experimentation independent of politicians who are under pressure to supply pork to their constituents and of corporations that are under pressure to supply profits to their shareholders.

If the denouement of the Empire conversion exemplifies the willingness of the public sector to appropriate private assets, the epic also represents a partial retreat by government from its regulatory trajectory of the 1980s. State authority in New York, and elsewhere, now is hemmed in by a thicket of opponents and obstacles to further expansion. Decades of tax-and-spend liberalism have created broad-based popular support for tax reductions; the appropriation of the Empire assets was driven in no small measure by the governor's desire not to delay tax cuts despite being in a budgetary crisis.[50] In 2003 Local 1199 and GNYHA broke their tactical alliance with Governor Pataki after he recommended new cuts in Medicaid funding for health care institutions.[51] This antitax legacy undermines state governments ability to finance insurance subsidies and Medicaid expansions for low-income citizens, driving them to questionable fiscal maneuvers of the sort witnessed in the Empire conversion. The evolution of the employment-based health insurance system and the insurance carriers strategic orientation create additional barriers to the pursuit of governmental objectives by traditional means. Large employers are ever more willing to shift fringe benefits from state-regulated insured products to federally regulated self-insured programs. Empire Blue Cross administers many self-insured corporate accounts, and its conversion to a Delaware-chartered for-profit corporation from a New York chartered nonprofit organization has been driven by the desire to participate more fully in a market segment where national networks and information technology investments are essential to achieving economies of scale.[52]

The conversion to investor ownership will eliminate most vestiges of Empire's dependence on New York politics. Wall Street is only too cognizant of the financial risk posed by overzealous regulators and underfunded public programs in particular states and is willing to pay a sizable premium for the stock of insurers that are well diversified across geographic boundaries and across products and customer segments.[53] Empire now has the same obligations to New York State as do its competitors, paying approximately $60 million in corporate income taxes, premium taxes, and sales taxes each year.[54] It must obey the myriad benefit mandates, guaranteed issue and community rating rules, and anti managed care regulations listed in its IPO prospectus as business risks to investors.[55] That prospectus makes no mention, however, of any special rights or any special responsibilities to serve as the insurer of last resort, to restrain hospital cost inflation, to help enforce CON provisions, or otherwise to serve as an arm of state government.[56]

If the Empire conversion has a tragic aspect, it lies in the inability of the New York political establishment to use the firm's assets to make headway against any of the state's serious health and health care problems. The $300 million originally envisaged to flow from the conversion could have endowed a center for research and demonstration projects; the $1 billion anticipated in the political compromise and the $2 billion valuation in the IPO could have reached beyond studying problems to solving them. Bankrolling a union wage increase and reelecting an incumbent governor are worthy goals, at least from some perspectives, but they leave the state health policy problems exactly where they were when Empire still was a nonprofit organization owned by the community.

The lengthy conversion process finally did clarify the ownership status and locus of accountability of Empire Blue Cross. Old, nonprofit Empire belonged to the state, the state is governed by its elected representatives, and its elected representatives are accountable to organized political constituencies. New, for-profit WellChoice belongs to its shareholders.[57] The special obligations and dispensations that once characterized the insurance company have been transferred, at least in part, to the hospital industry. Use of Empire's assets for wage increases represents only one among many financial and regulatory supports, which include special funding for graduate medical education, regulatory barriers to competition from freestanding ambulatory care centers, and impediments to entry by investor-owned hospital chains. Tripartite coregulation by the state, hospital industry, and Empire is gone and has been replaced by a new regulatory triangle of the state, hospital industry, and Local 1199. In health care and especially in New York State health care, it's all politics, all the time.